Shares of T-Mobile, Sprint jump on report of 'active' merger talks

Cowen & Company predicts a merger would have a 50% of gaining regulatory approval.

Shares of both T-Mobile and Sprint shot up on news that the carriers “are in active talks” about a merger.

CNBC reported this morning that T-Mobile parent Deutsche Telecom and Sprint parent SoftBank “have been in frequent conversations” regarding a stock-for-stock tie-up that would see Deutsche Telekom become the majority owner of the combined carrier. Details are still being negotiated, according to unnamed “people close to the situation,” and a final agreement is likely weeks away—if it happens at all.

Shares of Sprint jumped more than 8% on the news this morning, while T-Mobile’s stock climbed nearly 3%.

The election of President Donald Trump coupled with the conclusion of the FCC’s incentive auction several months ago has given rise to a flurry of speculation regarding potential M&A activity in the mobile market. And much of that talk has centered on some kind of merger between the nation's two smaller major wireless carriers.

SoftBank spent more than $20 billion to acquire Sprint in 2012, and the company had hoped to acquire T-Mobile as well, merging the carriers to take on Verizon and AT&T. That effort was dropped when U.S. regulators indicated they were opposed to a merger, however.

A deal would make sense on multiple levels. The carriers’ spectrum holdings are complementary—T-Mobile is in the process of expanding its coverage through the 600 MHz airwaves it recently won at auction, while Sprint sits on an enormous pile of 2.5 GHz spectrum that T-Mobile openly covets—and the move would result in three dominant network operators of similar size. Meanwhile, T-Mobile’s momentum over the last three years is undeniable, and Sprint continues to struggle to gain its financial footing even as it gains market share.

Whether any tie-up would gain regulatory approval is still unclear, however. Cowen & Company Equity Research this week pegged the chance of an announced deal between the two players at 60% to 70%, down from a previous estimate of 80% to 90%, and said the chance of approval would be roughly even.

“We continue to believe 1) a deal makes sense both strategically and financially (at the right price of course), and 2) the current regulatory environment seems to provide the best window to attempt a transaction,” Barclays said in its own research note. “Whether both operators can get to a meeting of the minds on whether an attempt makes sense is of course the critical first question. Moreover, whether that deal gets approved remains the next question. We can see a path forward, but ultimately it comes down to whether the respective parties can.”